Assignment 6] Show your work

1. ( T or F ) As the company?s risk rises, its cost of capital declines.

2. ( T or F ) Since interest payment is tax-deductible, the after-tax cost of debt is, in general, higher tha the before-tax cost of debt.

3. ( T or F ) When the firm announces its decision to issue more shares of its common stock in the near future, the price of the stock typically increases.

(The following information applies to the next five questions)

Ink Inc. has decided that the capital it is raising will consist of 10% preferred stock, 20% common stock, 30% retained earnings, and 40% debt. Ink has outstanding 20 year semi-annual, 6% coupon bonds selling for $950. The par value of the bonds is $1,000. Ink?s common stock sells for $50 per share. Ink expects that it will pay a $2 dividend next year and that its dividend will grow at 5% a year. If Ink sells new common it must pay a $5 per share flotation fee. Ink?s preferred stock currently sells for $54, and its annual dividend is $5 per share. If Ink were to sell new preferred stock, it would pay $3 per share as flotation cost. Ink?s tax rate is 40%.

4. What is Ink?s after tax cost of debt capital?

5. What is Ink?s cost of preferred stock capital?

6. What is Ink?s cost of common stock?

7. What is Ink?s cost of retained earnings?

8. What is Ink?s cost of capital?

9. Why is the following statement true? ?Other things being the same, firms with relatively stable sales are able to carry relatively high debt ratios.?

10. Suppose that your firm?s CEO wants to take more risk in capital expenditure. As a result, your firm will be more risky. Who will benefit from his decision, the bondholders or the stockholders? Explain carefully.

Assignment 6] Show your work 1. ( T or F ) As the company's risk rises, its cost of capital declines. 2. ( T or F ) Since interest payment is tax-deductible, the after-tax cost of debt is, in general, higher tha the before-tax cost of debt. 3. ( T or F ) When the firm announces its decision to issue more shares of its common stock in the near future, the price of the stock typically increases. (The following information applies to the next five questions) Ink Inc. has decided that the capital it is raising will consist of 10% preferred stock, 20% common stock, 30% retained earnings, and 40% debt. Ink has outstanding 20 year semi-annual, 6% coupon bonds selling for $950. The par value of the bonds is $1,000. Ink's common stock sells for $50 per share. Ink expects that it will pay a $2 dividend next year and that its dividend will grow at 5% a year. If Ink sells new common it must pay a $5 per share flotation fee. Ink's preferred stock currently sells for $54, and its annual dividend is $5 per share. If Ink were to sell new preferred stock, it would pay $3 per share as flotation cost. Ink's tax rate is 40%. 4. What is Ink's after tax cost of debt capital? 5. What is Ink's cost of preferred stock capital? 6. What is Ink's cost of common stock? 7. What is Ink's cost of retained earnings? 8. What is Ink's cost of capital? 9. Why is the following statement true? \"Other things being the same, firms with relatively stable sales are able to carry relatively high debt ratios.\" 10. Suppose that your firm's CEO wants to take more risk in capital expenditure. As a result, your firm will be more risky. Who will benefit from his decision, the bondholders or the stockholders? Explain carefully